Tuesday, September 26, 2006

Shorts and Longs (Cont'd)

Several months ago, I wrote my initial "shorts and longs" blog entry covering a few things I'd bet against (shorts) and a few things I like (longs). Here's a new entry in the longs column: the US economy relative to the rest of the world.

There has been a lot of talk about the US losing its leadership position to China and/or India over the next few decades. I think it's going to take a lot longer than that. Here are some interesting facts I read in a David Brooks column in the New York Times.
  • The US economy accounted for 30.52% of the world's GDP in 1971. Today it accounts for 30.74%.
  • The US accounts for 40% of the world's R&D spending.
  • The US produces more engineers per capita than China or India.
  • US unemployment rates for scientists and engineers are no lower than the rates for other professions, which implies the US has no real shortage of these talents despite countless press references to the contrary.
  • At least 22 out of the top 30 universities in the world are American, and more foreign students come to American universities now than before 9/11/01.
There are plenty of problems with the US, and the country's culture of unrelenting consumption will certainly come back to bite the economy at some point. But the US is so far ahead of every other nation on so many dimensions, it's way too early to start even thinking about a global economy led by any other nation.

8 comments:

Rick said...

You know, Jeremy, you shouldn't take David Brooks very seriously. He's not a very good researcher, really:

US is about 20% of the world's GDP, roughly equal to the share of the European Union. China is about 15%.

Here's the source: https://www.cia.gov/cia/publications/factbook/rankorder/2001rank.html

Here you can find the numbers for R&D expenditures per country. http://www.nsf.gov/statistics/infbrief/nsf06306/
So I suspect that his R&D number for the US is also wrong. It spends 40% more than the European Union (whose share is dragged down by the new members--all the strongest members are on par with the US), but it doesn't look that the absolute number is right. In addition, the US R&D number is a "global" figure, a good portion of which comes from the US affiliates of foreign companies (such expenditures doubled from 1994-1998).

It is also a little silly to talk about university rankings, although U.S. News makes a good business out of that.

So although his opinion might hit home and be dear to one's heart, he's a columnist who won't spend 5 minutes to check his numbers.

Jeremy said...

Rick, thanks for the comment and for providing the sources which appear to dispute David Brooks' version of the facts. Generally, I hold the NY Times in high regard. Of course every journalist is bound to screw up now and then, and even the Times has been subjected to journalistic scandal, but David Brooks has built his reputation over 20 years working for publications including the Wall Street Journal and The Weekly Standard. (His full bio is here
http://topics.nytimes.com/ref/opinion/BROOKS-BIO.html).

That said, I emailed him this morning to ask for the sources supporting the facts in his column. I will post his reply if/when it arrives.

Thanks,
Jeremy

Justin Label said...

I cannot comment on Brooks' sources. However, I believe I can shed light on a common point of confusion reflected in Rick's comment. Rick cites the CIA Fact Book in stating that the US produces 20% of global GDP whereas China produces 15%. However, these statistics reflect GDP Purchasing Power Parity (PPP), that is, the size of each economy adjusted for standards of living. Clearly, 1 US$ goes a lot furhter in Shanghai (not to mention the western provinces) than it does even in Des Moines, hence nominal Chinese GDP is dramatically inflated by this measure.

According to the IMF, the US represented 28% of nominal GDP in 2005, whereas China produced 5%. The US economy therefore remains 5.6x larger than China's by this more straightforward statistic.

I made precisely the same misreading of the CIA page this very weekend. The CIA page is not well annotated in my opinion, and is unfortunately the #1 Google result for "GDP rank." Fortunately, Wikipedia, which reproduces the IMF rankings (link below) is the #2 result. Given the growing popularity of Wikipedia, hopefully this clearer source will overtake the CIA shortly.

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

rick said...

Justin,

With all due respect, I am afraid I wasn't confused. Albeit far from perfect, PPP-adjusted GDP is the appropriate way to measure the relative size of economies. In order to calculate the world GDP, one should bring the numbers from different countries to the appropriate common denominator. It is especially problematic in case of countries like China, where the official exchange rate of yuan is kept at an artificially low level on purpose.

You can read about the need for the PPP adjustment in Wikipedia
here.

Alex Ferrara said...

The relative size of an economy is only one part of the story. I think productivity among the largest economies is a more important metric because it is an indicator of prosperity. Perhaps lookng at per capita GDP or measures of competitiveness and total factor productivity would make more sense. I think we'd find that the U.S. is close to or at the top.

Clay Whitehead said...

I agree with a lot of the arguments that you make Jeremy, but I'm long America because I think that we're strongest at the most important part of the value chain -- making successful businesses out of technological advancements. Our advantage in this area is due to several factors, chief among them management education.
America, without a doubt, leads the world in this area. I agree that the numbers of scientists/engineers is important, but other countries don't posses the same populations of formally trained managers capable of capitalizing on an advancement to create a company with sustainable competitive advantages. This is where the real money is made. My argument is certainly lacking in hard data. But, I think there is a lot of sense in looking at management education as a key source of our competitive advantage. ( I realize that the MBA is a relatively recent phenomenon, but management education has likely helped the US thrive in the transition to a service and knowledge based economy. While the % of global GDP that America accounts for may or may not have dwindled, the composition of our GDP has changed dramatically.)
A few last thoughts on other complimentary drivers:
-Regulatory. There are relatively few regulatory impediments to starting a new business here compared to other parts of the world.
-Structural. We have the world's healthiest and most robust capital markets and VC ecosystem.

Also, in the interests of full disclosure, I am currently an MBA 1 at Stanford.

Anonymous said...

I think all of this is true but we have to remember that the GDP doesn't take in consideration the value of our debt and future promises made to other countries. Most banks would value the money of a certain country based on their trade & futures debt. It is like a very fat man. He may eat 5X more than the next man, but in order for him to survive he must east 4X the next man. He might only buy 2X and the get a loan for the other 2X. That 2X accrues interest (and some ire for not getting their money quickly) and this is why there have been rumblings of China and India surpassing us. If their currency becomes more important in the world market, then this economy would depress faster than a crying widow.
Remember the dot.com fiesta: no party has ever ended gently in world market. ever.

Anonymous said...

let me rephgrase my analogy:

The fat man may make 5X more things than the next man, but he has to eat 4X more than the next man to properly survive.